Retail Use Tax

E-commerce sales reached $453.46 billion in 2017. That means that states should have collected billions in use tax. Use tax is the flip side of sales tax. It’s usually set at the same rate as sales tax and applies to any transaction where the buyer doesn’t pay sales tax.

For example, your company might have bought a case of pens for resale in your store. You didn’t pay sales tax. If you grab one out of the box to use in your office, the state now wants you to pay a use tax on that pen. You’ll need to register, calculate the use tax you owe, and file it with the state.

Or, to take an example that has caused a lot more excitement, think of online sellers who don’t collect sales tax. You’ve probably ordered things online either for your business or yourself, without paying any sales tax. From the point of view of the state, they are still owed that money. Retailers may collect sales tax for the convenience of shoppers, but they’re not always required to. If you didn’t pay sales tax, you’re supposed to add the same amount in use tax when you do your taxes.

Consumers who buy goods online without paying sales tax are required to figure up the amount of sales tax they would have paid and to pay it along with their income taxes. By and large, they don’t. Only 1.6% of consumers pay use tax, according to an NPR report.

It isn’t practical for tax collectors to go after all those consumers who have no idea how much use tax they owe. It can be worth their while to go after businesses. A sales and use tax audit is no fun if you haven’t been keeping records.

South Dakota vs. Wayfair means the end of retail use tax

The Supreme Court handed down a decision recently that changes all that. States can now insist that online sellers collect sales tax. Until now, this has only been possible when the seller had a physical presence in a state. An earlier Supreme Court decision called Quill said that sales tax could only be required for businesses that had a physical presence — such as a building or employees — in the state.

The South Dakota law requires sales tax collection from any online seller who does $100,000 in business in South Dakota, or 200 transactions. The Supreme Court upheld the law, so online sellers will now have the burden of collecting sales tax. Your company may still have use tax to pay when you remove an item from inventory for your own use, but you’ll no longer be required to keep track of use tax for online purchases in most states.

Since retail use tax has proven to be mostly uncollectable, most states will choose to require all retailers to collect and remit sales tax.

It’s just big companies, right?

That depends on how you define “big.” The South Dakota law requires sales tax collection from any company that has 200 transactions or $100,000 in business in South Dakota.

Retail transactions on the web have an average basket size of $82.00. An e-commerce company with 200 average transactions in the state would bring in just $16,400 for the year. This could be quite a small business.

Etsy seller OhGeezDesign offers a snappy “SoDak retro” enamel pin for nine bucks. 200 sales of these items would rack up a mere $1800 in total sales. The company has items for Michigan as well. Include tourists and homesick Midwesterner transplants, and they could be reaching a lot of states.

So much for the claim that small e-commerce sellers will not be affected by these laws. This is only true if we imagine that every online seller has fairly even sales across all 50 states. Commenters on the sales requirement tend to say that retailers will only have to collect sales tax in every state if they earn 50 times $100,000 — a cool five million a year.

Just a little bit of reflection shows that this may be far from true. Small online retailers will have a tough time predicting accurately which states they’ll need to collect sales tax from. Most will have to get set up in all 50 states. Since some goods and services are taxable in one state and not in another, ignorance in this case is definitely not bliss. Small and medium-sized businesses that sell online need something like Sales Tax DataLINK’s sales tax tools: web-based tools that stay up to date as changes happen. This will be too much to keep up with on your own. We can help.

In theory, consumers will still be liable for use tax when they buy from a company too small to be required to collect sales tax, but in reality, this change in the law spells the death of the retail use tax.

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